Practice Session Test: Taxation Law Essay

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Student Name____________________
Student Number__________________

THE UNIVERSITY OF NEW SOUTH WALES

AUSTRALIAN SCHOOL OF BUSINESS

SCHOOL OF TAXATION & BUSINESS LAW

LEGT 5551 - TAXATION LAW

Practice MID-SEMESTER CLASS TEST

DURATION OF TEST, ETC
One hour plus 10-minutes reading time.
You must not write on the pro-forma answer sheet during reading time.

IMPORTANT INFORMATION AND INSTRUCTIONS

This test is worth 20% of the marks in this subject.
You must answer all questions in 2B pencil on the pro-forma answer sheet provided.
This is a 100% closed book test. You are not permitted to have any written materials or blank paper in your possession during the test.
You are permitted (indeed required) to bring into the test room: an approved electronic calculator; two 2B pencils; a pencil sharpener, and an eraser (rubber).
You must place your UNSW student identification card face up, on your (or adjoining) desk.
All mobile phones must be switched off and placed in your bag (if you have one). Your phone (and bag, if you have one) must be placed at the front of the test room. If you are caught with a mobile phone in your possession, or near your desk, during the test, you will receive 0 out of 35 for this test.
You are not permitted to retain this test paper. You must place your name and student number in the top right hand corner on the front page of this test paper. If you do not return all pages of the test paper with your name and student number on the front, you will receive 0 out of 35.
During the test, you must not detach any pages, nor remove the staple binding this test paper.
You must keep your test paper flat on your desk at all times.
All section references are to the Income Tax Assessment Act 1997, unless stated otherwise.

QUESTION ONE

Hayley is an accountant and a licensed financial planner. Hayley operates her business as a sole trader and she has around 700 clients. Hayley has two full-time employees and four part-time employees. Hayley deals with most of the high net worth clients directly. Recently, Hayley updated the financial plan for a high net worth client, Jess. Jess and her husband had also become friends of Hayley over the years. The updated financial plan provided for the higher use of gearing and the use of derivatives (e.g. options) to maximise returns on investments. As a result of implementing the updated plan, Jess made a 29% return on investments during the 2010-11 year. The return on investments last year was only 8%. The remuneration for Hayley’s services in designing and implementing the plan was a flat fee of $2,700 and 5% of the returns achieved over a base level of returns. Given that the excess return over the base level achieved by Jess was $120,000, Hayley received $6,000. For Christmas 2011, Jess also gave Hayley a Christmas card that cost $8.00, a $230 bottle of Malt Whisky (alcohol) and a new mobile phone that cost Jess $450. These items were all gift-wrapped. Jess has given Hayley Christmas presents for the last 10-years except that this year the presents were more expensive than usual.

Which one of the following is the most correct statement?

(a) (1) The $2,700 and the $6,000 are income on ordinary concepts as the proceeds of operating a business or included in assessable income under s 15-2 and (2) The value of the card, the whisky and the phone are not included in Hayley’s assessable income because they are non-cash benefits.

(b) (1) The $2,700 and the $6,000 are income on ordinary concepts as the proceeds of operating a business or included in assessable income under s 15-2 and (2) The value of the card, the whisky and the phone are not included in Hayley’s assessable income because they come within the definition of a “fringe benefit” in s 136(1) of the Fringe Benefits Tax Assessment Act 1986.

(c) (1) The $2,700 and the $6,000 are income on ordinary concepts as the proceeds of operating a business or included in assessable income under s 15-2 and (2) The value of the…